End of year planning strategies – Getting the most out of your superannuation and pension accounts

21 May 2020

Terrie Wendland, Associate Wealth Adviser, Private Wealth Advisers |

As 30 June approaches, superannuation strategies come to the forefront, particularly now we have seen the economic and societal changes and challenges that COVID-19 has and will continue to present over the year ahead.

What retirees need to consider

For those of you in retirement and utilising your account-based pension, you will be familiar with the requirement to draw a minimum pension percentage each financial year based on your total account balance and age as at 1 July of each year. Due to the negative effect on portfolio balances as a result of COVID-19, the government has halved the minimum annual pension payments requirement for the remainder of this financial year and next (2020-2021). This reduces the need for the sale of assets in a weak market to fund ongoing pension payments, giving portfolios an opportunity to recover.

Age

Standard
minimum %

Reduced
minimum %*

Under 65

4%

2.0%

65 – 74

5%

2.5%

75 – 79

6%

3.0%

80 – 84

7%

3.5%

85 – 89

9%

4.5%

90 – 94

11%

5.5%

95 +

14%

7.0%

* Applicable for 2019-2020 and 2020-2021 financial years

The challenge for retirees now is determining what your individual income requirements are going to be in this new world. Have the restrictions impacted your spending? Certainly those with travel plans will be wondering ‘what next?’. Will any reduction in spending be ongoing? Do you have cash accumulating outside your super fund? Can this be used to fund living expenses in the short term? Subsequently, does this allow you to reduce your pension drawdown for the 2020-2021 financial year, noting that after this time pensions will return to standard minimums?

Your pension can be reduced to the minimum without preventing a later increase or ad hoc withdrawal should you need to.

The majority of super funds have taken the approach for next financial year of reducing all pension holders to the reduced minimum if their nomination is to receive the minimum. For most, this 50% cut to income is not sustainable. For others, it is a welcome opportunity to preserve capital within the zero tax environment.

The key objective leading up to 30 June for our BDO Private Wealth advisers is to work with you to ensure you continue to maintain a comfortable lifestyle.

Approaching retirement

For client’s that are in the accumulation phase and are saving for their retirement, there are some end-of-year strategies worth considering. Again, like retirees, the strategy going forward largely depends on your cash flow position. Do you have surplus cash available? Will you need these funds for any extraordinary expenditure over the coming years or are you ready to commit those funds to your retirement savings pool?

Making further contributions to superannuation can reduce your tax now and give your retirement savings a boost. However, you don’t have to be approaching retirement to be thinking about your superannuation balance. Making additional contributions early on in your career can have a significant impact due to the effects of compounding returns.

Pre-tax (concessional) contributions are made with pre-tax money and are usually ongoing contributions such as your employer superannuation guarantee contributions and salary sacrifice contributions. Setting up an ongoing pre-tax contribution direct from salary is an easy method to save for retirement. Additionally, if you find at this time of year you are below your annual $25,000 limit you can make one-off additional contributions.

You can also make after-tax (non-concessional) contributions. The annual after-tax contributions cap is $100,000 but depending on your age and super balance you can utilise the ‘bring forward’ rule which would allow you to contribute up to $300,000.

For couples there are some additional strategies that can be used to maximise your retirement savings. It is a familiar story that often one partner’s superannuation balance far exceeds the other. As a couple approaches retirement the challenge in maximising their retirement savings often rests with evening out their respective balances.

Recontribution strategies, where one person withdraw funds from their fund and recontributes to their spouse’s fund utilise both spouse’s transfer balance caps, i.e. the $1.6m pension fund limit.

Contribution splitting allows you to split up to 85% of the previous year’s pre-tax contributions with your spouse.

Spouse contributions are advantageous where one spouse is earning a low income. For example, if your spouse’s income does not exceed $37,000 per year and you make a $3,000 contribution to their super fund, you would be eligible to claim a tax offset of $540. Additionally your spouse would receive a $500 government co-contribution payment.

Determining what you can do with the resources you have is where we can help. Please contact a BDO Private Wealth adviser if you would like to discuss your situation.